Digital taxation has raised everlasting debates at the international level and has become part of the OECD Base Erosion and Profit Shifting (“BEPS”) package discussions. The 2015 Action 1 Report concluded that the digitalization of the economy and some of the resulting business models present challenges for international taxation. Several options are being considered to capture the value generated by new technologies: extending the permanent establishment definition (“Virtual PE”), levying a withholding tax on certain types of digital transactions or levying a so-called “digital equalization levy.”
The public consultation held by the OECD on November 1, 2017, showed that currently there is no consensus on either short-term or long-term changes to the international tax rules that would address the perceived weaknesses of the current framework. The OECD calls for a growth-friendly reform stemming from a global consensus and should release an interim report to the G20 scheduled for April 2018.
The discussions surrounding taxation of the digital economy may shift up a gear as Europe steps in the debate. Europe wants to give a “triggering push” to the taxation of the digital value creation. Although the EU works are conducted within the OECD’s canvas, the member states are willing to anticipate any potential setbacks at the global level. Whereas an internationally agreed upon solution remains preferable, it seems that April 2018 may be too far away for some EU member states.
Europe wants a change in the source rules. As a rule of thumb, countries should have a right to impose taxes on the profits generated in their markets. The current (inter-)national tax framework does not properly allow for that. Therefore, there is a need for both long-term and short-term solutions.
As a long-term solution, the EU wants a revision of the PE definition to capture the digital value creation.
In the short-term, and to anticipate the length of the international negotiations, the EU Commission proposes three options: (i) an “equalization tax,” (ii) a withholding tax on digital transactions and/or (iii) a distinct tax on the profits generated by digital services and/or advertising activities.
As confirmed by the EU Council on December 5, 2017, the equalization tax is the short-term measure preferred by “many” member states. According to the EU Commission, the tax would be imposed on the revenues from digital activities in the European Union and would, hence, resemble a sales tax. It would remain outside the scope of double tax conventions concluded by member states.
Regardless of the option chosen, it is likely to raise significant issues such as potential double (economic) taxation, divergences in interpretation, compatibility with supranational rules (for example, double taxation treaties) and increased compliance burdens.
If the European Union cannot afford to wait for an outcome at the OECD level and implements its own “digital tax,” this will generate complex and numerous challenges and would impact all businesses (including the so-called “traditional” businesses) whose revenues could, to a certain extent, be linked to digital technologies.
With the European Union ready to act and tempted to implement temporary measures as it waits for a global consensus, the EU Commission is expected to move forward with legislative proposals by early 2018.